On October 30, 2015, the Securities and Exchange Commission (“SEC”) issued final rules that will allow private companies to use crowdfunding platforms to offer and sell securities (i.e., “interests” or “shares” in their companies) to investors. As I wrote in a past blog post (when the rules were merely proposed), Regulation Crowdfunding (“Reg. C”) has the potential to significantly change or expand crowdfunding going forward. Reg. C implements key provisions of the Jumpstart Our Business Startups Act (“JOBS Act”).

Reg. C allows qualifying private issuers to raise up to $1 million in a 12 month period through online crowdfunding using “regulated intermediaries” (platforms like Kickstarter or IndieGoGo that have met the various requirements of Reg. C). Individual investors are subject to tiered ceilings on how much they can contribute/buy in a given 12 month period. There are rules and restrictions on how much an issuer can sell to one investor in the 12 month period, pertaining to how an issuer can advertise the issuing, and resale of securities. Certain companies are not eligible to issue securities through crowdfunding and there are reporting and disclosure requirements for issuers.

Reg. C will likely become effective sometime in May, 2016. In the meantime, if your business is interested in offering a crowdfunding campaign under Reg. C, now is the time to begin conducting a thorough analysis of whether such a venture is ultimately in the company’s best interest.

I suspect, though time will tell, that most new start ups will not find undertaking this type of campaign viable. This type of crowdfunding campaign may be more viable for established companies looking to grow capital quickly for expansion.

If your company is interested in a securities crowdfunding campaign, contact Burger Legal at info@burgerlegal.com or 336.705.1016. Burger Legal can assist you in navigating the rules and reporting requirements as you determine whether a campaign is in your best interest.

Last night, South Carolina Governor Nikki Haley signed into law the “Stone Bill”, which removes restrictions on smaller beer making companies in the Palmetto State. The bill allows breweries the ability to operate on-site restaurants serving food (such as brewpubs) and lifts consumption restrictions for on-site restaurants serving food (from 48 oz. per customer). Companies operating under the new regulations will be able to sell beer, wine and cider produced by other beverage manufacturers, and will be able to apply for retailing permits to sell bottles and cans on-site.

Current brewpubs (that don’t manufacture on-site) could convert their current permits to brewery licenses, but any such conversion restricts the brewpub from the ability to sell liquor. Brewpubs would have the right to sell their beer to wholesalers, for off-site distribution, after conversion as well. Producers cannot hold both a production brewery license and a brewpub license/permit. Currently, it costs about $400 annually for a brewery license, while brewpubs pay about $2,000 annually for a brewpub license/permit, in South Carolina.

The Stone Bill was promulgated with hopes of enticing popular out-of-state beer producers such as Stone Brewing, based in San Diego, and Deschutes Brewery, based in Bend, Oregon, who are looking to open sister breweries (much like New Belgium Brewing and Oskar Blues Brewing have done in Asheville) along the east coast. In any event, the new law will benefit local craft breweries already based in South Carolina.

An interesting discussion came across the Estate Planning Listserv of which I am a member this past week. A fellow North Carolina attorney was assisting with an estate administration (probate) where the Will was prepared using standard LegalZoom fill-in-the-blank forms. I’ve ranted about LegalZoom (and similar websites like RocketLawyer) before, and find the need to do so again.

More than once in my five or so years of practice, I have encountered someone who used one of these “self help” websites to prepare legal documentation for themselves. 99% of the time, the documents they prepared were incorrect as to form, woefully lacking in terms of substance, and at times, failed to even adhere to North Carolina laws for such documents.

In the case of the fellow NC attorney, the decedent (i.e., deceased person) prepared their own Will and Trust document on LegalZoom, using LegalZoom’s self help forms. When it came time to probate the Will, the clerk of court found the Will to be indecipherable to the point where she was unwilling to admit the Will for probate. The Will was not only vague as to the dispositions of the decedent’s intent, but it also attempted to create a trust instrument that is not recognized under either North Carolina probate law or the NC Uniform Trust Code. In short, the Will that the decedent probably paid less than $100 for wasn’t worth the paper it was printed on. In order to probate the Will, the attorney needed to obtain a declaratory judgment from the Superior Court, determining exactly where the Will disposed of various property and possessions.

That doesn’t sound so bad, right? Well, had the decedent paid a little bit more up front, it would have saved quite a bit of time and money for the estate, the attorney, and the beneficiaries/heirs of the decedent. It costs money to pay an attorney to mop up the mess (likely considerably more than it would have cost to pay an attorney to prepare the proper documents correctly in the first place). Plus, it extends the process for probate (which, if you have ever been an executor or administrator for an estate, you know is tedious and time consuming even when it goes smoothly).

You get what you pay for, and if you’re only paying $100 or less for a document that purports to direct the disposition of all of your property after your death, it would behoove you to question the “person” you’re paying to provide that document to you for such a low price. In the long run, paying a little bit more up front to have a North Carolina-licensed attorney prepare the document(s) for you may save your estate and loved ones considerable time and money in the long run.

Following an upheaval of concern over the FDA’s proposed rule regarding brewers’ use of spent grains, the FDA has announced that it plans to revise the language of the proposed rule. The newly revised language should be released for additional public comment sometime this coming summer. The previously proposed rule would have required brewers to dry their used, wet spent grains and pre-package them before shipping to farmers for various uses. The cost associated with this likely would have dramatically changed existing relationships between brewers and farmers across the U.S.

The revised proposed rules appear, from what has been released to the American Malting Barley Association and the Beer Institute by the FDA, to be considerably less invasive and stringent. The revised proposed rules will likely focus on ensuring the cleanliness of the silos that hold the spent grain and the trucks that transports the spent grain to farms (with no apparent requirements to dry or pre-package the spent grains). While there may be some additional cost associated with this process, it will undoubtedly be less than what brewers (and farmers) may have incurred under the previous proposed rules. The picture should become more clear when the revised proposed rules are released this summer.

North Carolina is the proud home of about 100 breweries and Asheville regularly challenges Grand Rapids, MI and a number of cities and towns in Colorado (and elsewhere) for the honor of Beer City USA. It is estimated that North Carolina breweries have an impact of about $791 million on the North Carolina economy. Locally, Foothills Brewing has been an integral part of the Winston-Salem and Piedmont Triad economy for several years, while Small Batch Beer Co. and Hoots Beer Co. have grown steadily in the craft beer scene since opening within the past year. Typically, especially with larger craft breweries, spent grains from the brewing process makes its way to farms, where it is used to feed farm animals (and less traditionally thought of farm animals– worms and tilapia).

However, a new animal food rule promulgated by the US Food and Drug Administration (FDA) as the FDA works to implement the Food Safety Modernization Act (signed into law in 2011) threatens to end that symbiotic relationship between brewers and farmers. The new rule, which appears to be a heavy-handed FDA interpretation of the Act, will likely make that relationship too costly to maintain (for both farmers and brewers). In short, the rule will require any such byproduct to be prepackaged, so as to avoid human contact, before it is received by the farm. According to a national Brewers Association, which conducted a member survey in 2013, approximately 90% of the spent grain produced by beer-makers is fed to livestock. Where will much of the spent grain go if the FDA rule is in place and makes the brewer/farmer relationship too expensive to maintain? Most likely the landfill.

At least one US Senator from Colorado has opened dialogue with the FDA, with the goal of reducing the heavy-handed interpretation of the Act. Unfortunately, the comment time period for the proposed rule has already closed, and the FDA will issue the final rule sometime later this year. There is more than enough documented data and evidence, over many decades, that spent grain byproduct does not compromise food safety to animals or humans. Hopefully the FDA will reexamine its interpretation of the law, and make adjustments that will be manageable for craft breweries all over the country.

Read more about this FDA rule and its impact in Colorado and North Carolina here and here.

So you’ve decided on your brewery’s name, logo, and the names and logos for some of your beers, completed all of the research and completed the trademark registration process. Congratulations! You may be feeling a (false) sense of security right now, since clearly if your mark is registered with the US Patent and Trademark Office, you must be good to go until it’s time to renew the registration, right? Do not fall into this trap.

One of the most important policies your brewery (and any business holding trademark rights) must have is that of regularly monitoring for and documenting of unauthorized use of your trademarks and, once unauthorized use is detected, taking the steps to enforce and protect your trademark rights.

To monitor for use of your trademark (or confusingly similar trademarks), it is simply a matter of regularly searching the USPTO database, the USPTO Official Gazette and, generally, the world wide web (i.e., “Google it”). Craft brewers should also consider searching beer review apps and websites such as Untappd, Beer Advocate, and Beer Buddy, which may make it easier to locate potentially conflicting marks within the brewing arena. If you happen to find a use of your mark, or a confusingly similar mark, you should then document as much as you can about the unauthorized use. When it began (as best you can tell), location, the name of the person or company that is making the unauthorized use, date of discovery, the type of goods or products it’s being used in conjunction with, etc. Many companies can hire either an attorney or a number of other paid service providers to handle all of the above.

If you happen across an unauthorized use of your trademark (or, again, something confusingly similar), it’s time to take action. This can range from a simple educational letter to full blown litigation. Normally, it’s best to start somewhat light handed, with an educational letter, and ramp up toward litigation if the desired result does not occur. An educational letter simply notifies the infringer of their actions, and educates them about trademark law, complete with a congenial request that they cease the infringement. If this method does not achieve the desired result, a “cease and desist” letter is usually the next step, demanding the infringer stop all manners of infringement and threatening a lawsuit if they do not. The final (and, generally, most expensive) method of enforcement is full blown litigation, suing the infringer in court. There are some other similar avenues (such as administrative actions with the USPTO to oppose another trademark’s application if it’s confusingly similar to your own) to consider as well.

Failure to adequately monitor for infringement and enforce your trademark rights may result in a loss of trademark protection for your own trademark. Make sure to have an effective policy in place and to adhere to that policy strictly.

About a week ago, the North Carolina Court of Appeals issued a new Opinion (Copypro, Inc. v. Musgrove, No. COA13-297 (N.C. App. Feb. 4, 2014)) which centered on noncompetition agreements (also referred to as a “covenant not to compete”).

The case involved an employer (Copypro) suing its former employee (Musgrove) for violating a noncompete agreement that Musgrove had signed before beginning employment. The agreement stated that, for a period of three years following termination of employment, Musgrove could not compete with Copypro in any of the thirty-three eastern North Carolina counties in which Copypro conducted business (sales). Musgrove spent almost all of his time, on behalf of Copypro, in only two counties (and eventually resigned upon learning that he was not the only salesperson working for Copypro in those two counties). Within a year after leaving Copypro, Musgrove found another sales job with a direct competitor of Copypro, but focused on three counties which were not the two counties in which Musgrove had previously worked. Copypro learned that Musgrove was still working in Eastern North Carolina, and directly competing, and sued Musgrove for breach of the noncompetition agreement.

The court indicated a higher level of scrutiny for noncompetition agreements contained within employment agreements and that such agreements must be “(1) in writing; (2) reasonable as to time and territory; (3) made a part of the employment contract; (4) based on valuable consideration; and (5) designed to protect a legitimate business interest of the employer.” However, the agreement “must not impose unreasonable hardship on the employee and should not, for that reason, be broader than necessary to protect [the employer’s] legitimate business interest.” In this case, the court found that the noncompetition agreement fulfilled the first four requirements above, but did not fulfill the fifth. The agreement was broader than was necessary to protect the Copypro’s legitimate business agreement and so the court found in favor of Musgrove.

This opinion illustrates the significance of hiring an experienced attorney to draft and review any covenants not to compete in a business’ employment agreement. These noncompetition clauses must be drafted very carefully and narrowly, so as to be fully enforceable and valid in a court’s opinion. Failure to do so may result in a former employee being able to compete with your business directly (and locally), which may ultimately cost more money, time, and headache to your business in the long run.

Trademarks are one of the single most important legal issues your brewery might ever deal with. Ideally, you should register for a trademark for your brewery’s name, logo, each individually named beer you create, and each beer’s unique logo. But before you go forward with registering any of these, you should have an attorney conduct a full search for any prior existing names or logos that might be similar or identical to your proposed mark. There are a number of different places to look and an experienced trademark attorney will be able to find anything similar (regardless of whether the prior existing mark is registered with the USPTO).

The craft beer industry is growing, countrywide and especially in North Carolina, so new beer names and logos are being created every day. Therefore, your new imperial stout’s might require a little extra creativity. Additionally, although beer, wine and spirits (liquor) are three separate classes of marks with the USPTO, the USPTO considers these “related products” and so a wine or liquor with a substantially similar name to your proposed beer name may be found to cause confusion (and therefore, be the basis for a lawsuit).

If you plan to create a new beer soon, and already have the name for your new beer, make sure to have a trademark search done immediately. If the name is available, the law allows you the register for the mark without even having used the mark in commerce (stating that you have an intent to use the mark). With the expanding craft beer industry, expedience in researching, and subsequently registering your trademark will serve two major purposes: (1) researching ahead of time will help you to avoid being sued for infringing on a similar trademark (i.e., will save you a lot of time, suffering, and most importantly, money) and (2) registering ahead of time will ensure adequate protection of your beer name and logo from trademark infringement by another craft brewer (ensuring you the ability to be compensated if someone else steals your mark).

A number of “inventions” are protected by patents, filed with the United States Patent and Trademark Office. Could you obtain a patent for your fantastic milk stout craft beer recipe? You could certainly be issued a trademark for the label placed on your beer bottle. But would you want to patent the recipe for your various types of craft beer (assuming you could)? The answer is probably not. If you were able to get a patent, that patent becomes instantly available to the public– anyone can see the entire recipe, for free (and you will have a heck of a time trying to protect the patent)! So, then, how can you protect your secret recipe for your most popular brew?

The best way to protect your brewery’s secret is by having a policy in place, which all of your employees are aware of, and through contractual agreements with your employees. But, what is a trade secret? A trade secret is any confidential business information which provides a business a competitive edge. You should start planning to protect your beer recipes and other secret beer making processes (if any are special and unique) as soon as you start the business. Create policy manuals for making sure there are no “leaks” to outside parties and so all of your employees know exactly how to handle your company’s trade secrets. Have confidentiality and non-disclosure agreements, including non-competition provisions prepared for all employees to sign. The key is to show that you tried to protect your trade secrets, in the event you ever have to litigate to protect your trade secret, and there are a number of different ways in which you can try to protect your trade secrets.

Whether you’re just starting your brewery, or have been open for some time, it is important to insure your trade secrets are adequately protected. Coca-Cola has protected its recipe for its signature soda using these methods for decades! Confidentiality and non-compete agreements have specific requirements and must be drafted carefully. Consult your attorney to have an adequate agreement prepared to protect your brewery’s secret beer recipes!

Looking for investors or start up capital for your new craft brewery or brewpub? Not interested in a loan? There may be another solution available to you: crowdfunding.

You may have heard of crowdfunding. It has grown exorbitantly over the past few years. Online crowdfunding websites such as KickStarter and IndieGoGo have been used by thousands of entrepreneurs and start up companies to obtain start up capital to build a product and a business. To date, in exchange for monetary contributions, these companies have had to offer something in return, such as the product being created, at a discounted price. About a year ago, for instance, I contributed a set amount of money to a KickStarter campaign focused on creating a unique iPad stand called the Slope. In exchange, I received the Slope for an amount $15-$20 less than the retail price when the product was completed (my contribution doubled as the purchase price).

In late October, 2013, the Securities and Exchange Commission (SEC) released proposed rules regarding equity crowdfunding. While the rules have been proposed, they are currently under a 90 day comment period. Therefore, the earliest that equity crowdfunding could become legal would probably be Spring of 2014, but more likely the rules will not become official (and therefore, equity crowdfunding will not become legal) until the third or fourth quarter of 2014. The difference, if equity crowdfunding becomes legal, is that contributors to a company will become actual equity shareholders in the company. Traditionally, if a company wanted to solicit contributions from the public in exchange for shares, the company had to file with the SEC and follow the SEC’s strict guidelines (which typically required great legal expense). These new rules will change everything.

Under the new rules, a company (including any of its related subsidiaries or parent companies) can raise up to $1,000,000 in a 12 month period from an unlimited number of investors in small amounts. Investors do not have to be accredited with the SEC for these types of contributions. The solicitations must come via an internet platform and all communications must be publicly viewable on the platform (or via a registered securities broker). The $1M cap exemption from traditional SEC rules does not include other exemptions. For instance, if a company receives $200,000 through another method (other than crowdfunding) also exempted by the SEC, that $200k will not apply to the $1M cap above.

However, the SEC did place limits upon individual crowdfunders. If a crowdfunder has an annual income and net worth of less than $100,000, that individual can only crowdfund the greater of $2,000 or 5% of their annual income or net worth. If a crowdfunder has an annual income or a net worth of greater than $100,000, that individual can crowdfund 10% of their annual income or net worth up to a $100,000 hard cap, per year. The $100k hard cap applies to all investors.

These are just a few of the highlights from the proposed rules (the SEC’s rule proposal is a hefty 585 pages). If you are considering crowdfunding for your new craft brewery or brewpub, and especially equity crowdfunding (once it becomes legal), you should contact an attorney to help you navigate and follow all of the SEC’s rules (and other laws impacting equity crowdfunding and start up businesses).